Sainsbury's to buy Asda, both fashion lines to continue, Walmart to own 40%+

With news breaking at the weekend of Sainsbury’s talks with Walmart to buy Asda and the US retail giant taking a stake in the combined firm, Monday saw the UK supermarket chain confirming that a deal has been struck.

George at Asda

It said the companies have “agreed terms in relation to a proposed combination of Sainsbury's and Asda to create an enlarged business.” And that enlarged business will own two of the biggest fashion line-ups in Britain via the Tu Clothing range at Sainsbury’s and Asda’s George label.

Sainsbury’s said the combined chains “will create a dynamic new player in UK retail with an outstanding breadth of products, delivered through multiple channels.” And it added that “enhanced scale and a strengthened balance sheet will deliver a great deal for customers, colleagues, suppliers and shareholders of both businesses.”

That last point about it being a great deal for everyone was key given the opposition that has emerged to the deal in the UK. While big Sainsbury’s shareholders have approved it, British politicians, unions, newspapers, employees of both chains and some members of the public have expressed concerns.

Their worries focus on the combined group having a dominant market share and thus reducing competition, as well as the prospect of job losses and store closures.

But looking on the bright side, Sainsbury’s said in its announcement: “The retail sector is going through significant and rapid change, as customer shopping habits continue to evolve. This has led to increased competition across grocery, general merchandise and clothing, as customers seek ever greater value, choice and convenience. Bringing Sainsbury's and Asda together will result in a more competitive and more resilient business that will be better able to invest in price, quality, range and the technology to create more flexible ways for customers to shop.”

WHAT ABOUT WALMART?

And where does Walmart come into it all? While on one level, this represents the US giant throwing in the towel, with its 20-year ownership of Asda having proved a disappointment in recent years. But on another level, it cements its interests in UK retail. Sainsbury’s said that the deal will result in Walmart holding 42% on the issued share capital of the combined business and receiving £2.975 billion of cash, which values Asda at around £7.3 billion on a debt-free, cash-free and pension-free basis. But Walmart will not hold more than 29.9% of the total voting rights in the enlarged unit.

Tu Clothing

Sainsbury's said that the deal will create “one of the UK's leading grocery, general merchandise (GM) and clothing retail groups, with combined revenues of £51 billion” last year.

And it is significant that the company included clothing in that list with the fashion operations of both Sainsbury’s and Asda accounting for sizeable market shares in Britain.

Sainsbury's brought forward the announcement of its full-year results that had been due on Wednesday and said that “general merchandise and clothing, including Argos, continue to outperform a challenging market.”

While general merchandise sales (through Argos and the Sainsbury’s own-label offer) fell 0.8%, they outperformed the market and gained market share. And clothing sales rose almost 4% with clothing seeing impressive growth online of 45%.

The company didn't give a lot of detail about Asda, but it did say that the supermarket delivered its fourth consecutive quarter of comparable sales growth in Q1 and that it also experienced strong growth online, especially in clothing.

LOOKING AHEAD

So what are plans for the future? Well, the combined business will be led by the Sainsbury’s management team, but Asda will continue to be run from Leeds with its own CEO (Roger Burnley, a former Sainsbury’s exec), who will join the group operating board of the combined business.

It’s significant that the two distinct supermarket chains are to be continued, which is good news for the teams behind both Tu and George, although it's likely that in the long term there will be some synergies in order to benefit from buying at scale and not duplicating costs.

It will be interesting to see how the company develops the chains and differentiates them from each other with it saying on Monday that it wants to “enable them to sharpen their distinctive customer propositions and attract new customers.”

And, of course, we’re likely to see the Argos chain rolled out into Asda stores too with that business’s GM offer (which also includes clothing) being even more widely available than at present. And with Sainsbury's also having been adding DPD parcel and eBay collection points in its stores, that's another development that we’re likely to see happening at Asda.

OPPOSITION AND OPPORTUNITY

But after the question of what plans the company has, the next biggest question is whether it will all be able to push the deal through in the form it expects. As mentioned, there's plenty of opposition out there and a competition authority referral is likely. Even if the deal is allowed through, it could still come with some caveats such as the combined business having to shed a number of stores. The firm will have a network of over 2,800 Sainsbury's, Asda and Argos stores after the deal, as well as several giant web stores.

Tu Clothing

Some of the opposition to the deal is likely to focus on the reduction of choice in the UK market, but Sainsbury's is emphasising throughout that it believes this combination will enhance choice. And it said the combination will “enable investment in areas that will benefit customers the most: price, quality, range and creating more flexible ways to shop in stores and through digital channels, across Sainsbury's, Asda and Argos. We expect to lower prices by [around] 10% on many of the products customers buy regularly.”

It also said that the agreement will deliver benefits to the combined business through a close relationship with Walmart, “both as a strategic partner and long-term shareholder, allowing the business to share knowledge and technology developments between Walmart, Sainsbury's and Asda.”

And it added that it should “create significant opportunities for suppliers to develop differentiated product ranges, become more streamlined and to grow their businesses as the combined business grows.”